Exchange Efficiency with Weak Property Rights
45 Pages Posted: 15 Oct 2012 Last revised: 16 Oct 2012
Date Written: July 26, 2012
We show that the first welfare theorem obtains independently of the strength of property rights protection. In an exchange setting, a large class of legal rules (what we call generalized liability rules) are exchange-efficient. Included in this class are property rules (generalized liability rules with very large damages Ds), standard liability rules (generalized liability rules with Ds that track the owner's valuation), and even rules which afford possessory interests only very weak protection (generalized liability rules with very small Ds). This result corrects a previous misconception in the literature, and yields the provocative conclusion that strong property rights are not required for exchange efficiency.
Keywords: property rules, liability rules, efficiency
JEL Classification: K11
Suggested Citation: Suggested Citation